It seems every week I read some Realtor’s report of the market turning around. It’s usually full of colorful realtor-speak like “there’s never been a better time to buy”, “if they wait they’ll be sorry”, “long term, real estate is your best investment” and my current favorite, “Scraping along the bottom”. The funny thing about bottoms though, they’re not all flat. One second you are cruising along the abyssal plain and the next second you fall into the Marianas Trench and get crushed like an old chevy at a monster truck rally.
Has SoCal hit the bottom? Is it really a great time to buy? I seriously doubt it, and here are just a few reasons why.
The first reason is a simple one. This bubble like nearly all bubbles will probably fully implode (When most bubbles implode they tend to overcorrect a bit). Prices in SoCal have tripled in the last 10 years. Even if they were to fall 50% they would still be well above pre bubble levels. They need to fall about 66% to drop back to pre bubble levels. Can they fall that far? Sure they can. Will they? I doubt it in most cases, because there would have been some normal appreciation on those 10 years. Given a normal 3% appreciation they would need to fall about 55% to get back into the normal range. According to most charts, the decline in the IE is currently averaging about 30%. That would indicate we have about another 25% to go.
Reason number two is probably the biggest factor keeping me from believing there is a bottom anywhere close. There is still a gargantuan amount of distressed properties hitting the market (foreclosures people!). The foreclosure numbers are through the roof and still accelerating. There is no hope of this trend reversing any time soon. The peak of the subprime rate resets runs right through the end of this year. The foreclosures are another 6 to 9 months behind that. Then there is the Alt-A wave, which runs through late 2011. Many of those properties will already have sold or walked away from long before then so I’m not expecting that wave of foreclosures to rival the current one, but there will certainly be some.
The shear number of distressed properties on the market make any hope of recovery about as likely as Ron Paul being elected President. In Feb nearly 50% of the homes sold in the IE were foreclosures, last month it was almost 60%. That number is probably only going to go higher. Until those are worked out of the system there is little hope of prices going anywhere but down.
Reason number 3 is related to reason number two. The prices are still in a nose-dive. People know this and will continue bidding low. Currently median in the IE has dropped 27.2% in the last year according to the California Association of Realtors. If the prices are still falling how can we have hit bottom?? When the prices start to rise again (for at least 3 months in a row) we can start talking about the possibility that we hit some sort of bottom.
Reason number 4 is the inventory levels are still way too high. The current IE inventory is somewhere close to 50,000 units. Last month we sold just over 3000 units. That equates to a 16.6 month supply. Most realtors will tell you that a normal balanced market has about a 6 month supply of inventory. We are currently running 2 to3 times that amount. The inventory might fall as the summer hits but come fall it is likely to skyrocket again (like it did last year).
Reason number 5 is the overall economy is not looking very healthy. It’s all but certain we are in a recession. Jobs are being shed and buyers are being lost. As more and more “regular” buyers are lost that will leave a larger percentage of investors. Today’s investors are looking for deals. They are only going to buy properties if the prices are low enough so as to pencil out as an income property. Currently very few properties fall into this category. Most smart investors will look for small, inexpensive homes. These are cheaper to maintain and easier to rent. Those big 3000 s/f (and bigger) homes will sit and sit until the prices fall because investors don’t want them and the regular buyers can’t afford them at the current prices.
Reason number 6. I just asked my Magic Eight Ball and it said “outlook not so good”. Who can argue with that!
And finally, lucky #7. AFFORDABILITY. Even though homes have fallen substantially in the last year, affordability is still very, very low. In California it’s something like 24% that can afford the median home (up from 14%). Median income is still under $60k in most areas. The new median of $309k in Riverside is still over 5 times the median income. Riverside County median price was traditionally under 3 times the median income, until this bubble hit. At 3 times the median income the median home would be roughly $180k. Even I’m skeptical it will fall that low. But if it follows its usual pattern it will fall back into that price range eventually (3X the median income).